Sell American. Buffett Is

In an October 16, 2008 op-ed entitled 'Buy
American. I Am', Warren Buffett revealed that he was moving his own wealth
into equities, adding that "If prices keep looking attractive, my non-Berkshire
net worth will soon be 100 percent in United States equities." Coming
from someone that regularly contends he never tries to time the markets,
this was easily Buffett's most bullish call since October
1974. And while it would take and additional 5-months before stocks would
reach a 'bottom', it is now safe to conclude that Buffett, once again, was
right.

To recap: Back when many believed all was lost Buffett had the courage to
invest in America based largely upon one elegantly simple premise:

"...the policies that government will follow in its efforts to alleviate
the current crisis will probably prove inflationary and therefore accelerate
declines in the real value of cash accounts...Equities will almost certainly
outperform cash over the next decade, probably by a substantial degree."

28-months after Buffett penned the above: America is still here, stock prices
have bolted significantly higher, and it is now accepted wisdom that policy
makers have successfully 'forced' investors into riskier assets by reducing
the returns on safe assets. Accordingly, the legend of Buffett continues
to grow...

Needless to say, the conditions that made Buffett bullish back in late 2008
are no longer prevalent today. Rather, 'fear' in the marketplace has vanished,
stock prices have outpaced any fundamental improvement in the economy, and
the story of cash being a dead asset has been beaten to death. Ever the contrarian,
Buffett's historic romp into equities is, at least for the moment, over.

Buffett Begins Hibernation Process

In the fourth quarter of 2010 Buffett continued to reduce his (Berkshire's)
equity positions, cashing out approximately $1.2 billion (Berkshire
13F filings). Buffett also failed to produce any new buys and only added
to a single long-term holding (Wells Fargo). When contrasted against yesterday's
penchant for deal making these activities, or lack thereof, strongly suggest
that Buffett is becoming bearish on equities.

It has been argued that many of Berkshire's recent stock sales are related
to the retirement of GEICO CEO Louis Simpson (the same story used to explain
Berkshire's stock sales in the third quarter of 2010). However, GIECO-related
portfolio reshuffling does not fully explain why Berkshire's cash hoard continues
to skyrocket. To be sure, Berkshire's upcoming 10K will likely reveal that
Buffett has added more than $10 billion in cash since the second quarter of
2009 (up approximately +50%) - a figure well above the increase in tangible
equity created by Berkshire during the same time. Furthermore, given recent
trends Berkshire will likely soon eclipse the record $67 billion in cash and
'fixed maturity securities' Berkshire hit in 2005.

Assuming stock prices do not capitulate lower, this 5-quarter theme
of cash accumulation could remain in play for some time. After all, remember
that the last time reckless monetary and fiscal stimulus efforts united to
produce a recovery Buffett spent nearly 5-years amassing cash.

In short, the problem of having more cash than ideas is not one that Mr. Buffett
has had to deal with since he went on a buying binge in 2008. And while it
is not known to what degree Buffett has reduced his personal exposure to equities,
that Berkshire cannot find any equity bargains and is starting to hoard cash
in a relatively big way is self explanatory: sell.